Profiting from real estate ventures

Real estate investments are popular for three main reasons: they offer diversification from other investments, they provide relative stability, and they are fairly likely to return a profit. Investing in properties can be an exiciting way to add to your portfolio.

Strategies for smart investment

As with any form of investment, the higher the stakes, the larger the risk. Starting off small is a smart move if you're new to real estate investing.

Renting out a room
A nice option for those looking to get their feet wet is to rent out a room in their own home. This can be done on an annual lease or on a month-to-month basis. Check with your homeowner's insurance policy to see if you are covered in the event of a tenant accident or injury. You may need to purchase an umbrella policy to protect yourself.

Before you ever decide to rent out a room or area of your home, carefully weigh how this may affect your life. A new tenant brings their habits, history, and personal life into your home. Provided that you're comfortable with that, such an arrangement can be a nice way to ease into the world of real estate investing.

Buying to rent
Many investors buy homes for use as rentals, with tenants paying rent as the home's value appreciates. Some owners even decide to leave their properties as rentals indefinitely; comfortable with the flow of income that tenants provide. If you want to purchase a property for use as a rental, keep these things in mind:

  • Rental markets are different from home buying markets. Hot areas for home sales may not be the destination for the more "transient" populations that rent.
  • Certain areas, such as those near colleges or military bases, are premium rental neighborhoods.
  • Renters' needs are different than those of buyers. A large yard may be important to a typical family with kids or pets, but may not matter to singles or young couples.
  • You should set rent at least five percent above your monthly costs. Your costs include monthly principal payment, interest, taxes, insurance, and yard/maintenance services. Studying the "For Rent" section in the paper is a good way to compare rents of similar homes nearby.
  • You will need an emergency slush fund for any problems that may come up and to cover gaps between tenants.

Buying to sell
If you're buying a home but don't have plans to rent it out, you're probably either buying a "fixer-upper" or you intend to live in the home until its sale (or both). By living in the home for two "aggregate" years out of five preceding the sale of the home, you will receive a $250,000 capital gains tax exemption if single, and a $500,000 exemption if married. Other things to consider:

  • As always, single-family homes with good floor plans are the safest bet.
  • Hot markets may indicate appreciation that won't be present by the time you sell the home. Look instead for steadily rising markets to maximize profit.
  • Condominiums do not appreciate as quickly as single-family homes, but they're not a bad investment if in a high-demand market.
  • As always, avoid overpaying!

Investing in land
Vacant land is the least liquid property asset, and in general has the weakest potential for short-term profit. If you are interested in land investment, extensive research is absolutely essential. Check any and all zoning information and potential public projects. Areas that you project as future "hot" zones may never warm up, or even worse may undergo changes that cause their value to plummet. Undeveloped land is easy to maintain, but takes longer to appreciate and generally is more difficult to sell than land in developed areas.

The truth about fixer-uppers

The "fixer-upper" home has gained an almost mythical status in the world of real estate. Such properties enjoy two conflicting reputations: either they're seen as a sure-fire way to big money, or they're viewed as a disaster waiting to happen (think the Tom Hanks movie "The Money Pit"). The reality is somewhere in between. It is true that fixer-uppers can entangle unwary buyers in a web of problems and unforeseen expenses. It is also true that fixer-uppers can be great bargains with large profit potential. Following a few simple guidelines will increase your chances of being in this second group.

What constitutes a good fixer-upper?
A good definition for a fixer-upper is a home that has deteriorated to a condition below the neighborhood's standards. Search for homes that have fallen by the wayside but are well located. A home that needs a lot of work and is in an undesirable area likely won't return the money you invest in repairs.

Look for homes with cosmetic problems
Sometimes all a home needs is an update in style. Cosmetic repairs such as new interior and exterior paint, new wallpaper, new carpeting, and new cabinetry are relatively inexpensive and can increase your selling price. Conversely, major structural repairs are costly and may not add anything to the market value of the house.

Professional inspection
Get a professional inspection by the licensed inspector of your choice. Be on the lookout for major structural defects.

Pay attention to the floor plan
All the paint in the world won't help if the home you buy is poorly designed. A good basic layout with logical accessibility to important rooms is key.

Estimate remodeling costs in advance
In conjunction with a professional inspection, have your contractor create a detailed bid before purchase if possible.

Spend your renovation dollars wisely
Always keep resale value and the local market in mind when renovating. Items to focus on:

  • Kitchens
  • Bathrooms
  • Overall curb appeal

Specialized remodel jobs such as finishing a basement or installing a pool are not as likely to add value.

Foreclosures as investment opportunities

Savvy real estate investors always keep one eye on foreclosure listings, on the lookout for any chance to make big profits. If you're new to the game, learn as much as possible before jumping into your first foreclosure purchase. A brief overview:

What is foreclosure?
A foreclosure property is one that the lenders have repossessed due to the owner's failure to make their mortgage payments. The foreclosure process begins when the lender gives notice that the homeowner is in default. The homeowner then has a certain amount of time (which varies according to state) to either make up the missed payments or sell the house. After this time has passed, the lender takes title of the property.

The three main steps of foreclosure
In general, foreclosures have three basic stages, and each of these present different advantages for potential investors.

The reinstatement period - This is the owner's chance after notice of default has been served to either cure the default (by refinancing, for example) or to sell the home. Buyers can contact the homeowner to see if the home is available (listings of properties in default can usually be found in special subscription publications). Often the owner will accept a low payment for the chance to walk away.

A buyer purchasing a home during the reinstatement period will be "subject to" all existing encumbrances (second mortgages, unpaid property taxes, etc.) for the property in addition to the remainder of the primary mortgage. However, they also have the opportunity to inspect the property, something not usually available during the later stages in the foreclosure process.

The foreclosure sale auction - The particular procedures of foreclosure sale auctions depend on both locality and whether the auction is a judicial or private sale (such as a trustee sale). The auction may be presided over by a judge, sheriff, court official, or an appointed independent trustee.

Investors at such auctions typically bid on only the first mortgage, and all junior encumbrances are wiped out. Successful bidders can end up with great bargains, but can just as easily overpay for a home in poor condition. Cash is typically required, often immediately after the auction.

Buying after the auction - Many foreclosure properties do not sell at their auctions, and the lender retains possession. Most mortgage lenders prefer not to hold property, so buying directly from a lender after the auction can lead to good deals.

Are foreclosure investments worth the risk?
Foreclosure auctions are often filled with experienced investors, and many will advise novices to shy away from foreclosures entirely. While such properties probably aren't best for your very first real estate investment, they can present opportunities for newer investors who employ the help of a real estate professional. A cautious approach is necessary to avoid costly mistakes.
Jacqueline Elbert
Mailing Address
RE/MAX Realty Suburban Inc
11900 W 87th St Pkwy, Ste 120
Shawnee Mission, KS 66215
Phone Number
Business: 913.647.7154
Mobile: 816.520.3620
http://www.jacquelineelbert.com